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Donations Tax Credits – Have you claimed rebates for payments where there is a link with private education or childcare centres?

Inland Revenue has issued a new Revenue Alert regarding payments made to a private education or childcare centre, focussing on whether the payments are actually “gifts” which entitle people to claim charitable donations rebates. Please read below to see if this applies to you.

People are claiming rebates in circumstances where IRD considers a true “gift” of money has not been made.

Arrangements involve recharacterising payments made to attend private schools or childcare centres which would ordinarily not be donations so that the payer can claim a tax credit.

Payments are generally made to a charitable trust which either operates the education or childcare centre directly, or has an arrangement with a centre to provide those services.

Payments tend to be made by parents or close relatives of the children attending the facility. Under these arrangements the parents pay no (or low) fees for attendance. The trust receiving the “donations” then issues a receipt that payers use to claim rebate credits.

Not surprisingly IRD considers that (absent any objective evidence to the contrary) the purported donations are actually a substitute for fees. In many cases the payments are used to meet the centre’s running costs, which ordinarily the centre would have to recover from users by way of fees. Consequently the payments do not meet the definition of a “gift” and may not be used to claim rebates.

IRD has a number of active investigations and expects to start more. It also says it will seek recovery of rebates paid under these circumstances. Shortfall penalties, late payment penalties and interest may also apply to compound the problem (and cost) of inappropriate claims.

The issues are not always as clear cut as those summarised above but the essential elements are a serious matter, and Inland Revenue is clearly not happy about some of the arrangements it has identified. If you think you may be at risk, please contact us and we can discuss your situation with you.